We examine the relationship between concentration and price dispersion using variation induced by a merger in the Canadian mortgage market. Since interest rates are determined through a search and negotiation process, consolidation weakens consumers' bargaining positions. We use reduced-form techniques to estimate the mergers' distributional impact, and show that competition benefits only consumers at the bottom and middle of the transaction price distribution, and that mergers reduce the dispersion of prices. We illustrate that these effects can be explained by the presence of search frictions, and that the average effect of mergers on rates underestimates the increase in market power. (JEL G21, G34, K21, L13, L41)

Using transaction‐level data on Canadian mortgage contracts, we document an increase in the average discount negotiated off the posted price and in rate dispersion. Our aim is to identify the beneficiaries of discounting and to test whether dispersion is caused by price discrimination. The standard explanation for dispersion in credit markets is risk‐based pricing. Our contracts are guaranteed by government‐backed insurance, so risk cannot be the main factor. We find that lenders set prices that reflect consumer bargaining leverage, not just costs. The presence of dispersion implies a lack of competition, but our results show this to be consumer specific.

Abstract.  This paper measures the economies of scale of Canada's six largest banks and their cost‐efficiency over time. Using a unique panel data set from 1983 to 2003, we estimate pooled cost functions and derive measures of relative efficiency and economies of scale. The disaggregation of the data allows us to include non‐traditional outputs as well as time‐varying, bank‐specific effects. Our model leads us to reject constant returns to scale. These findings suggest there are potential scale benefits in the Canadian banking industry. We also find that technological and regulatory changes have had significant positive effects on the banks' cost structure.

This research has benefited from the financial support of the NSF (SES-1024840). We thank the Canada Mortgage and Housing Corporation and Genworth Financial for providing us with the data. We also thank the Altus-Group. We thank the many seminar participants who have provided feedback on this paper. We have greatly benefited from discussions with Ken Hendricks, Ali Hortaçsu, Matt Lewis, Jack Porter, Alan Sorensen, and Andrew Sweeting. The views in this paper are those of the authors and do not necessarily reflect those of the Bank of Canada. All errors are our own. This paper has previously circulated under the title: "Price negotiation in differentiated product markets: The case of insured mortgages in Canada". The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

This paper provides a detailed empirical analysis of Canadian city housing prices. We examine the long-run relationship between city house prices in Canada from 1985 to 2005 as well as idiosyncratic relations between city prices and city-specific variables. The results suggest that city house prices are only weakly correlated in the long run and that there is a disconnect between house prices and interest rates. City-specific variables such as union wage levels and the issuance of building permits tend to be positively related to existing city house prices. Surprisingly, there is mixed evidence with respect to standard measures of economic activity such as per capita GDP and interest rates. JEL classification: C22, C32, R2Prix des maisons dans les villes canadiennes et segmentation du marché urbain. Ce mémoire présente une analyse empirique détaillée des prix des maisons dans les villes canadiennes. On examine cette relationà long terme de 1985à 2005 ainsi que les rapports idiosyncratiques entre ces prix et certaines variables caractéristiques de certaines villes. Les résultats montrent que les prix des maisons urbaines sont faiblement co-reliéesà long terme et qu'il existe une déconnexion entre le prix des maisosn et les taux d'intérêt. Certaines variables spécifiquesà certaines villes comme les niveaux de salaires des syndiqués ou l'émission de permis de construction tendentàêtre positivement reliées aux prix des maisons existantes. Surprenamment, les résultats sont mixtes pour ce qui est des mesures d'activité economique comme le PIB per capita ou les taux d'intérêt.